"It's the level, stupid......"

This is from a quote from Mervyn King, Governor of the Bank of England. Here is the full quote:

It's the level, stupid -- it's not the growth rates, it's the levels that matter here

I got this quote from reading Mohamed El-Erian's article in the Financial Times.  Dr. El-Erian coined the phrase the "New Normal" for economic growth.  While I agree with his conclusion, I don't entirely agree with his analysis for the "New Normal". 

The Equation Defined

Income Inequality + Financialization + Globalization = Destruction of the Middle Class

This equation is a work in progress for me.  I have tried an econometric model but it crashed my computer.  Seriously, we are losing sight of the much bigger picture that is playing out across the country.  Our policy makers are distracted by this financial crisis or intentionally ignore the plight of the Middle Class in the U.S.

Rail Traffic and the Recession

A few months ago, I noticed something that seemed strangely discordant about our "Great Depression 2": consumers were refusing to stay dead, but instead showed signs of - at least partially - rising from the grave.

But a look at truck traffic (which is only posted monthly) and rail traffic (which is updated weekly) showed a continued year-over-year slide.

I took a further look because one very prominent blogger has recently alluded to rail traffic several times, most recently saying it was "horrible" and "13-week moving averages are still moving lower, with no apparent end in sight" So, what's going on? Does rail traffic in particular mean the recession is continuing to plunge deeper into the abyss, or are there signs of some stabilization?

What Recovery? Myths, Lies, and Green Shoots

There are those that honestly think you can make a sustainable economy based on people buying things they don't need with money they don't have. Then there are those who just want to sucker in the sheeple so they can fleece them one more time.
Finally, there are the sheeple themselves - so scared that they will buy into any feel-good message about Green Shoots that the politicians and media sells them, and even defend it.

What none of these three groups want is for the general public to know what the actual numbers really are.
They don't want me to show you what I am about to show you.

The Deflationary Bust Deepens: May 2009 edition

This morning the BLS reported that consumer inflation increased +0.1% (seasonally adjusted) in May, (rising 0.3% non-seasonally adjusted). Year-over-year prices have fallen -1.3% into deflation. YoY consumer deflation is only surpassed by 1949 in the post-Depression era.

The first 5 months of inflation data are still in accord with the optimistic scenario I laid out in January:

In the Optimistic scenario, the fiscal and monetary stimuli, together with intelligent new political leadership in Washington, halt the meltdown perhaps by mid-year, and wage reductions remain the exception. In the Pessimistic scenario, the stimuli fail, and wage reductions spread, leading to a wage-price deflationary spiral.

May Leading Economic Indicators (1)

As Calculated Risk points out, economic cycles typically run in an order. The first portions of the economy to turn positive are typically personal consumption expenditures and residential investment -- even during the recession. Afterward, investment in durable goods such as equipment and software. Finally, after the recession (in terms of GDP bottom), unemployment and non-residential investment.

Research has shown that most economic pundits miss turning points because they just project past and current trends into the future. The best way to look into the economic future is usually just to look at the Conference Board's Index of Leading Economic Indicators.

In April, Leading Economic Indicators surged 1% as 8 out of the 10 turned positive or at least neutral. With May over, let's take a preliminary look at what those indicators might show.

Confessions of an Economic Populist

I am an economic populist. What does that mean? According to Wiki that means

a member of a United States political party formed in 1891 primarily to represent agrarian interests and to advocate the free coinage of silver and government control of monopolies.

a believer in the rights, wisdom, or virtues of the common people

The year 1891 was a long time ago are there really any Populist party members still around? Most likely no, and any politician who espouses populist rhetoric is instantly shouted down in the media by the opposition and even their own political party.

So who is the economic populist today?

Springtime during the Ice Age

On this Easter/Passover weekend while we are enjoying the blossoming of spring, Robert Reich has a blog post that nicely encapsulates a debate percolating through the econoblogosphere:

[W]e're not at the beginning of the end. I'm not even sure we're at the end of the beginning. All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy.... The real question is whether this means an economic turnaround. The answer is it doesn't.

The only economic fundamental that's changed ... is that so many people got so badly burned that the trust necessary for consumers, investors, and businesses to repeat what they did then has vanished.

I spent the better part of an hour yesterday evening debating Larry Kudlow on his CNBC program, along with Arthur Laffer and two other financial analysts, all of whom were sure that the stock market had hit bottom and was now poised for a major recovery. I admire cockeyed optimism, and I understand why Wall Street and its spokespeople want to see a return of the bull market. Hell, everyone with a stock portfolio wants to see it grow again. But wishing for something is different from getting it.

In other words, the "green shoots" side and "dead of winter" side are polar opposites, and never the twain shall meet.

Not so. As it happens, there's good reason to believe that both sides are right.

New Deal Democrat vs. New York Fed on Economic Recovery and the Yield Curve

The New York Fed has just published a study on the predictive power of the yield curve in 3 months vs. 10 year Treasury bonds. (warning: pdf. For an html friendly summary with graphs, see Prof. Mark J. Perrys' claims that the NY Fed research means the recovery has already begun!).

The study updates previous research dating from the 1980's onward to the effect that a negative spread between the 3 month and 10 year Treasury yields (negative means 3 month Treasuries pay more interest than 10 year Treasuries) is means economic contraction - a recession - 1 year later. Conversely, a positive spread means economic expansion 1 year later.

Based on that, the New York Fed says that the recession is over! I disagree.

The -In- DEflation Outlook for 2009

Here is a screen shot of the monthly readings of CPI for the last 3 years:

I include this because if you keep in mind what has been happening with Oil prices over that same time, a pretty decent picture of what is likely to happen to prices in 2009 takes shape. Remember that from August 2006 through January 2007, Oil prices decreased over 35% from $80 to under $55. Then Oil took off on a tear, hitting $147.50 in July 2008, before collapsing to under $35 by the end of the year. Oil prices are seasonal, rising in the first half of the year, and dropping in the later part of the year, and this is reflected in the "seasonal adjustment" of consumer prices.